SAC said to face US$1B fine and some admission of liability as insider trading settlement with U.S. nears

NEW YORK — A deal between SAC Capital and U.S. prosecutors to resolve a criminal insider trading case against the firm could come in a few days, a source familiar with the matter said on Thursday.

Any potential deal between Steven A. Cohen’s SAC Capital and federal authorities would likely involve some admission of liability by the firm and a payment of more than US$1 billion, the source said.

A settlement, which has been under negotiations for several weeks, would be a blow to Cohen and his reputation as one of the greatest stock traders of his generation. But people familiar with the billionaire trader say he has been telling people he is looking to put the nearly seven-year long investigation of his firm behind him.

The payment to the government would be structured as both penalty and forfeiture of trading profits allegedly derived from improper trading by Cohen’s hedge fund, the person familiar with the matter said.

The potential record-breaking penalty against a hedge fund firm comes as Cohen, a multi-billionaire, is trying to shed some assets.

The hedge fund manager is looking for buyers for all or part of a more than US$30 million equity stake he has in privately held Kadmon Pharmaceuticals, a person familiar with the situation said. Kadmon, a biotech concern, was founded by Sam Waksal, who served a five year prison term for insider stock trading. A spokesman for Kadmon declined to comment.

The New York Times earlier this week reported that Cohen, an avid art collector, is trying to sell to two paintings by Andy Warhol.

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The news of the potential settlement with prosecutors was first reported by the Wall Street Journal and The New York Times.

The Journal reported the deal might give Cohen’s firm credit for agreeing to pay more than US$600 million earlier this year to settle a civil insider trading lawsuit filed against the firm by the U.S. Securities and Exchange Commission.

Reuters and other news organizations have previously reported that Cohen and prosecutors were negotiating a potential settlement of up to US$2 billion. Reuters has reported that Cohen has told associates he wanted to settle the criminal case against his firm.

Spokesmen for prosecutors, the Federal Bureau of Investigation and SAC Capital declined to comment on the potential settlement.

SAC Capital is in the process of returning much of the US$5 billion in outside money it manages for others. About $6 billion of the firm’s money belongs to Cohen and his employees.

This summer, U.S. prosecutors indicted the billionaire’s firm, saying SAC fostered a culture in which employees flouted the law and were encouraged to tap their personal networks of contacts for inside information about publicly traded companies.

Cohen has not been charged with criminal wrongdoing. But the SEC did file an administrative proceeding against him charging him with failing to properly supervise the activities of traders at his 900-employee fund.

The SEC action could bar Cohen from managing money for outside investors, though it is not yet clear if this punishment will be part of the settlement. While investors have already requested most of their money back from the firm, banning Cohen from managing outside capital or forcing him to shut down the firm would be symbolic for the industry and the government, said Mark Kornfeld, a partner at law firm BakerHostetler.

However, even if Cohen is not banned from managing money, lawyers said an admission of wrongdoing from SAC in conjunction with a hefty fine would be a victory for the government.

“It will be a historic win for the prosecution, with the largest monetary penalty in history for an insider trading scandal,” Kornfeld said. “If they can extract an admission of wrongdoing from Mr. Cohen, who is one of, if not the world’s most well known hedge fund managers, that is a significant development.”

The potential deal between SAC and prosecutors comes as lawyers in Manhattan US Attorney Preet Bharara’s office gear up for next month’s insider trading trial of Michael Steinberg, a longtime SAC Capital portfolio manager who is accused of using inside information to make trades in shares of two technology stocks.

In the indictment unsealed in July against SAC Capital, Steinberg is listed as one of seven people either charged or convicted of insider trading while working for Cohen’s fund, which has posted an average annual return of 25% since its inception.

This year Cohen’s fund is up about 13%, roughly doubling the performance of the average hedge fund.